Diamond Foods Drops 20% on Restated Earnings (DMND)

Diamond Foods (NASDAQ: DMND) on Wednesday restated financial results for fiscal years 2010 and 2011 erasing $56.5 million in profit, and it posted a net loss for the first three quarters of 2012 after the walnut accounting scandal where the company improperly accounted for payment to walnut farmers.

Diamond has been battling to stay listed on the NASDAQ after the scandal, which claimed the jobs of top executives and scuttled its plan to buy Pringles potato chips. While Diamond Foods new CEO Brian Driscoll said that the company has now “turned a corner” with the restatements, new problems have emerged. That includes securing enough walnuts from growers who felt they had been underpaid and misled by Diamond in recent years, leaving the company short of nuts to provide to nonretail customers like bakeries and food processors.

The inability to get enough walnuts has ramifications on Diamond’s balance sheets. Mr. Driscoll said that the company will not secure enough walnuts this year to trigger a redemption clause related to a $225 million debt investment from Oaktree Capital Management LP the company received in May.

Meeting the walnut threshold would have cancelled warrants for Oaktree to buy Diamond shares at a bargain $10 a share and allowed Oaktree to exchange $75 million of the debt with a 12% interest rate for preferred shares that pay a 10% dividend. As it stands, the agreement may now dilute existing shareholders and means higher debt payments.

The saga led to the quick downfall of former CEO Michael J. Mendes, who took the company from a sleepy walnut-growers’ cooperative to a global snack-foods player with acquisitions of brands like Pop Secret popcorn and Kettle potato chips. Diamond’s audit committee, however, determined that there was “insufficient evidence” that Diamond’s management had deliberately intended to misstate financial results, Michael Murphy, Diamond’s acting CFO, said on Wednesday’s call.

Mr. Driscoll, who joined as CEO in May, said Wednesday he intends to continue to return the focus to its existing brands, but even there faces some problems. Kettle, which Diamond had wanted to develop into a mainstream brand, will put the brakes on that plan somewhat by curtailing discounts, instead focusing on the natural-foods channel where it has a strong base.

“(Diamond) continues to make efforts to repair grower relationships to secure walnuts for its culinary and international businesses, though supply likely will remain tight in the near-to-medium term,” Kenneth Zaslow of BMO Capital Markets wrote in a note.

BMO cut its price target on the stock to $13.00 from $18.00 while Barclays Capital halved its price target on the stock to $12 from $25. The stock closed at $15.36 yesterday, down 21.2%.

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